Issue #3 summary

At the heart of the matter
When is mutual or co-operative insurance Islamic? Misconceptions abound at both industry and Shariah-level. Dawood Yousef Taylor compares and contrasts co-operative insurance with takaful
What is the basis for modern takaful? It must first be understood that insurance, based on Shariah principles, is acceptable in Islam. There are many Koranic verses and hadith supporting this concept of takaful and, generally, this view is held by most Shariah scholars worldwide; although, a small minority still do not accept a takaful principle. Fewer, still, confuse takaful with conventional cooperative or mutual insurance, and a very small few see no difference between conventional insurance and takaful.
Where was modern takaful conceived and developed? Sudan in the late 1970s and Malaysia in the early 1980s can take full credit. This was confirmed in an Islamic Fiqh Academy ruling in 1985. Certainly this ruling can be viewed as significant, simply because the Islamic Fiqh Academy is the closest the Islamic banking and finance industry has to a worldwide Shariah ruling body.
As the Academy is made up of representatives from each of the Organization of Islamic Countries, it is difficult to consider contrary views expressed at a regional, national or industry level, without referring such arguments to the Academy. A translation of the resolution follows.
Resolution #9
The Islamic Fiqh Academy, emanating from the Organization of Islamic Conference, meeting in its Second Session in Jeddah, Kingdom of Saudi Arabia, from 10–16 Rabiul Thani, 1406 H (corresponding to 22–28 December 1985) ruled: After reviewing the presentations made by the participating scholars during the session on the subject of insurance and reinsurance; and after discussing the same; and after closely examining all types and forms of insurance and deeply examining the basic principles on which they are founded and their goal and objectives; and having looked into what has been issued by the Fiqh academics and other institutions in this regard, it is resolved that:
1) the commercial insurance contract, with a fixed periodical premium, which is commonly used by commercial insurance companies, is a contract that contains a major element of risk, which voids the contract and, therefore, is prohibited (haram) according to the Shariah;
2) the alternative contract, which conforms, to the principles of Islamic dealings, is the contract of co-operative insurance, founded on the basis of charity and co-operation. Similar is the case of reinsurance based on the principles of co-operative insurance; and
3) the Academy invites Muslim countries to work on establishing co-operative insurance institutions and co-operative entities for re-insurance in order to liberate the Islamic economy from the exploitation and violation of the system, which Allah has chosen for this ummah.

Scholastic congestion
The rapid growth of Islamic banking has strained the very heart of the system—the Shariah scholar. Majid Dawood discusses the issues affecting Shariah compliance of financial services in the long term
Islamic banking and finance is in a revival, driven by a demand from Muslims for a faith-based alternative to conventional banking services, whose very raison d’etre is riba, expressly proscribed in Islam.
Initially, conventional products were “Islamicized”, but there remains a shortage of Shariah-compliant financial products and suppliers. A core element of Islamic finance is Shariah-compliance certification—relating to both the product structure and the ongoing review of its implementation and utilization.
A major bottleneck in the Islamic banking and finance industry is the limited
number of Shariah scholars conversant with international banking and finance, and who are articulate in English.
Shariah scholars educated in the West and in disciplines such as economics have emerged as the prominent experts in Shariah compliance relating to fiqh al-muamalat. More scholars are emerging due to the growth of the sector and increased demand for Shariah advisers.
The Islamic banking and finance sector is playing catch-up with the conventional sector. The development of products in conventional banking has led to a demand for the development of equivalent Shariah-compliant products. This in turn has spurred the scholars to facilitate the development of new generic Shariah-compliant products. As the impetus grows, so will the product range.
The growth of Islamic finance is now
driving demand for Shariah-compliant “exotics”. Recently, sukuks and hedge-fund alternatives appeared on the market. The pace of product innovation is developing fast because the conventional financial institutions are entering the Islamic market. This growth is not as fast or as excessive as the dot com boom, but it is driven by a core bedrock of clientele and funds looking for a home over the longer term, and to be managed under Shariah precepts.
Greater demand for Islamic financial products

Criminal activities at spin drive
Despite concerted efforts to curb money laundering, criminals continue to disguise the origin of funds earned from illegal businesses and make them look like ‘an honest buck’. Zohair Said Al-Rabu’i reports
Money laundering is a global crime. Put simply, money laundering is the processing of criminal money from drug trafficking, prostitution, tax evasion, weapons smuggling and other illegal acts. Their illegal origin is disguised to enable the profits to be realised and the criminal enterprise to be advanced.
Money laundering represents an estimated 2–5% of the world’s gross domestic product (about US$1 trillion). According to reports, drugs account for between one-third and one-half of all money laundering operations.
Banks (conventional and Islamic), insurance companies and exchange houses are always vulnerable to money laundering, as such institutions are preferred targets because of the fast, safe services offered with the possibility of transferring huge amounts of money electronically around the globe utilizing their products and services.
Commitment
Islamic banks are strongly committed to the legal systems of the countries where they operate. For example, in the UAE Federal Law 4/2002, Article 13, Criminalization of Money Laundering: “A money launderer will be punished by imprisonment for a term not exceeding seven years, or by a fine not exceeding AED300,000 (about £44,430), and not less than AED30,000 (£4,430), in addition to confiscation of the proceeds.”
In Article 3 it is stated that financial institutions shall be criminally liable for the offence of money laundering if intentionally committed in their respective names or for their accounts. Punishment of financial institutions is a fine of not less than AED300,000 and not exceeding AED1,000,000 (£148,129) in addition to confiscation of the proceeds (Article 14).
Money laundering is broken down into three phases that apply to most, but not all, “systems”. These are placement, layering and integration.
Placement, considered the most difficult phase, is the introduction of illegal profits into the financial system. This can be achieved by dividing large amounts of cash into smaller sums that are deposited into bank accounts, or by purchasing a series of monetary instruments such as money orders and cheques.


The politics of Islamic finance
Islamic finance has grown significantly in the Middle East and the West but has been met with varying degrees of success. Professor Rodney Wilson examines the reasons for the contrasting receptions
There has been surprisingly little written on the politics of Islamic finance. Yet, government policy has obvious implications for its development. Some governments have been very supportive, notably those of Bahrain, Kuwait, Iran, Qatar and Malaysia. Others have been hostile, such as those of Algeria, Morocco, Tunisia and Libya, partly because they have had a mistaken view that Islamic finance is somehow linked to Islamic militants. In several countries, notably Turkey and Egypt, governments have oscillated between opportunism—seeing Islamic finance as a means of securing capital from the Gulf—and suspicion, concerned that it could be used by Islamic political movements perceived to be a threat.
Supporters of Islamic finance should not be equated with Islamic militants or seen as challengers to existing political authority. All that advocates of Islamic finance are seeking is the ability to manage their finances in a manner complying with Shariah law, a reasonable demand in any country, whether predominately Muslim or not, which is the case in most western countries.
Religious minorities should have the right to adhere to their religious faith in every aspect of their lives, including financial dealings. The exercise of these rights need not be a threat to the rights of others in a pluralist society, where citizens have choices about how they conduct their business affairs.
The experience of Islamic finance during the last half century shows it has tended to fare best in pluralist and tolerant societies, where governments give it the freedom and the space to develop. Malaysia is perhaps the best example, a multi-religious country that represents a microcosm of Asia’s cultural and ethnic diversity.
In Malaysia, a large proportion of Islamic banking clients are non-Muslim, ethnic Chinese. Islamic finance provides a bridge between the communities.
Similarly, within Islam there are no divisions between sunni and shia over Islamic finance. Given the widespread agreement among Islamic scholars about how the teaching of the Koran should be applied to banking and finance, the Islamic finance movement can be seen as a force that overcomes sectarian differences and unites Muslims.